Tax Payers are Avoiding Billions in Taxes Due to Lax IRS Enforcement

Taxpayers are avoiding billions of dollars in withholdings annually because of lax enforcement by the Internal Revenue Service, according to a recent audit by the Treasury Inspector General for Tax Administration.

The long standing problem relates to an IRS requirement that individuals earning income other than from wages or pensions provide the government with a tax identification number (TIN) and pay 28 percent of so-called backup withholdings or face penalties. Income subject to backup withholdings ranges from rents, royalties and gross proceeds paid to attorneys to other forms of fixed gains or profits.

The inspector general first blew the whistle on this problem a year ago and found in the new audit that payers failed to withhold nearly $9 billion in backup withholdings in 2013 – the most recent tax year reviewed by the auditors.

The inspector general’s staff also identified 13,647 payers who submitted 27,576 tax information returns with their tax identification numbers missing for two years in a row, in 2012 and 2013. Those payers were required by law to withhold nearly $4 billion, yet little more than $1 million – a miniscule fraction -- was actually withheld for the government.

Backup withholding was designed to make certain that the government is able to collect taxes on “all appropriate income,” particularly income that is not usually subject to withholdings as are wages, according to the IRS. At a time when the government is struggling to make ends meet without added borrowing, those billions of dollars in tax withholdings are much needed in the federal coffers.